The PPP as applied to the 2021 Tax Season

Giuseppe Garcia-Salamone
Giuseppe Garcia-Salamone
A co-founder of Tentho. An exceptional and seasoned accounting expert, a tech-savvy thinker who solves financial puzzles. An educator at heart.

A sigh of relief came for many small and medium-sized businesses when the second round of the Paycheck Protection Program was passed by legislature. However, this does not mean that it is time to relax, as many of these businesses need to keep the PPP in mind for the 2021 tax season. If you own an SME and are applying for the second round loan here are some key questions answered:

Which small businesses are eligible for the PPP second draw? 

The business must certify (or provide documentation) showing a reduction of 25% or more in revenue from 2019 to 2020. This is determined by quarter – and you must be a business that was operating before Feb. 15th, 2020 with at least 1 employee and employ no more than 300 employees.

There are certain businesses that get special allocations or increased funding with the PPP. The calculated monthly payroll costs are multiplied by 2.5 except for businesses with a tax code beginning with “72-”. If you are a business with the specific tax code “72”- which is the hospitality and food industry – you can receive 3.5 times the average monthly payroll costs.

Rules and impact of PPP loan forgiveness

Business owners apply for loan forgiveness through their banks. Loans under $150,000 have been granted a simplified forgiveness process through Form 3508S. Many banks have implemented a digital forgiveness process. Your bank should be contacted directly to receive information on their specific process for loan forgiveness.

PPP loan forgiveness is considered non-taxable income. Business owners can also deduct the usual tax-deductible business expenses incurred and paid with the PPP loan. This is an exciting benefit to businesses that have been severely impacted by the pandemic.

PPP loan forgiveness can impact some tax credits such as the Employee Retention Credit (ERC). A business must separate the payroll expenses that are used for ERC versus PPP forgiveness. In other words, businesses cannot double-dip on forgiveness and credits.

What is the difference between a PPP loan and an EIDL loan? 

An Economic Injury Disaster Loan (EIDL) is administered by the US Small Business Association. It is a loan with a 30-year term and a low business interest rate of 3.75%. The EIDL was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally declared disasters. Unlike a PPP loan, EIDL is not forgivable.

More than ever it is vital for businesses to hire a trusted advisor to help them with their taxes this year. Accurate records can help your CPA or tax preparer ensure there are no holes in your business taxes that are detrimental. Maximize proper benefits and make correct financial, tax, and business decisions by getting a consultation with Tentho today.

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